Workplace fraud affects bottom lines everywhere (Reporter's Notebook)

BIRMINGHAM, Alabama -- It might seem like fraud only goes down at the Health­Souths and the Enrons of the world, but each year, around 5 percent of the revenue of a busi­ness, government institution or nonprofit goes into the pockets of its employees, according to the Association of Certified Fraud Examiners.

Kelly Todd is a certified fraud examiner with Forensic Strategic Solutions, a Birmingham-based firm that investigates occupational fraud for businesses, nonprofit organizations and government institutions.

The total last year was esti­mated to be around $3.5 trillion, with organizations losing a me­dian amount of $140,000 and one in five causing at least $1 million in losses, a report from the orga­nization says. It might take months or years to uncover occupational fraud, but there are some steps compa­nies can take to detect "red flags," said Kelly Todd of the Bir­mingham- based financial inves­tigation firm Forensic Strategic Solutions, which combines fraud examination with investigative fi­nancial consulting. The firm is hired by a company, govern­ment, municipality, school dis­trict or church's legal counsel when fraud is suspected.

Whether it's a Fortune 500 cor­poration or a small business, the damages -- and sometimes the reasons for the damages -- are the same.

The ACFE's report said the most likely way of detecting fraud is through a tip, with the majority of them coming from within the company. But surprisingly, even though billions of dollars are lost, Todd said few employers press charges -- they just fix it.

"The reality of fraud is it's a problem everywhere and the footprints of the beast are the same regardless," Todd said in an interview at the company's downtown offices. The person committing the fraud first usually has some sort of "unsharable need" like greed, financial distress or an addiction such as to drugs or gambling. The person also needs an opportunity that allows them to commit the fraud, and they must have the ability to conceal it. The final piece of the "fraud triangle" includes a rationalization that the crime is acceptable.

An employee might say it's all right because he or she feels they should be earning more, or maybe others at the organization also are stealing.

So what can be done?

Todd said there are a number of red flags to consider but was quick to point out that they're just indicators that don't necessarily mean an employee is taking money. The case begins outside the financial books.

"When we start an investigation, we usually start in the parking lot," she said.

Her team looks at what kind of car the suspect drives, what kind of clothing the person wears and what house he or she lives in.

Those could all be signs of a person living beyond their means, unless there is another answer for the money. Another thing to look into is whether the person has recently experienced a significant life event, such as the illness or death of a family member, someone on their deathbed or obvious behavioral changes from emotional stress or drug use. A gambling problem is another cause that employers usually overlook.

Todd's team also looks at what type of control the person has on the money and if there are any checks and balances in place, along with whether there has been failure to provide timely financial reporting. Interestingly enough, one of the most regulated industries -- banking -- has seen a rise in occupational fraud frequency, Todd said.

Another big question is the company culture. She gave the example of a school that seemed in high spirits at the top, but in one division everyone could feel the discontent. It ended up being the spot of a $4 million fraud.

"The tone at the top is a critical element because if management has no regard for internal controls, then the employees won't either" she said.

Although corruption is the most prevalent method of fraud in most regions of the world, the ACFE report said billing was the most common way in the U.S. and Canada. Fifty percent of Asian occupational fraud cases were corruption, but only 25 percent of those in the U.S. Expense reimbursement, skimming, non-cash and check tampering each accounted for between 15 and 17 percent of U.S. cases.

"A financial statement tells a story and financial statements over time tell a story," Todd said. "You've just got to realize what that story is telling you."

Martin Swant covers tech companies, advertising agencies and business-related legislation. Join the conversation by clicking to comment or email him at mswant@bhamnews.com.